Rhonda's Blog

Tax Burden vs. Refund Mentality

It is that time of the year again. It is time to settle your 2018 account with the IRS and the state taxing authorities. It is always surprising to me how many taxpayers focus on whether or not they are getting a refund instead of how much they are paying in taxes (their tax burden) throughout the year.

Even with good tax planning, sometimes there is no refund or worse, you owe money to the IRS or the state taxing authorities. I personally prefer owing money to the IRS; that means that I used that money a little longer than if I had sent it to the IRS during the year. If I get a refund, that means that I "loaned" money to the IRS during the year and did not earn any interest on it. In that context, which do you prefer?

Of course, you do not want to owe the IRS or state taxing authorities so much money that you have to pay penalties and interest on the amounts that you should have paid throughout the year.

Lowering your tax burden should be the goal, not increasing your refund. This is where good tax planning is important. Now that the new tax law is in effect, it is easier to plan your tax burden for the coming year. Ask your tax professional to assist you with estimating your tax burden for 2019 when you review your 2018 returns.

You may also want to schedule a tax planning session with your tax professional or financial planner after tax season to identify tax reduction strategies that might benefit you.

Tax Preparation Services Recommended for Taxpayers on a Limited Budget

One of our goals at Always Spring Tax Services is to make sure that taxpayers are happy with their tax preparation services and with the price that they pay for their tax preparation services. We recognize, however, that many taxpayers are on a very limited budget and need tax preparation assistance but cannot afford to pay for that assistance. Our company cannot prepare tax returns for free (or at substantially reduced rates) or we will not be able to stay in business.

With that in mind, we would like to recommend the following services for those taxpayers that are on a limited budget and cannot afford our tax preparation fees:

1) The IRS offers a FREE FILE solution on their website for taxpayers with incomes under $66,000. To access this service, go to www.IRS.gov and select the 'File Your Taxes For Free' option. Follow the instructions on the screen.

2) For those taxpayers that are not comfortable with filing their taxes on the IRS website, the IRS offers free tax help through the Volunteer Income Tax Assistance (VITA) program. The income limit for the VITA program is $54,000. VITA sites are usually located in community centers, libraries, schools or shopping malls. Colorado Springs has several VITA sites throughout the city including one operated through the Reach Pikes Peak organization on Tejon Street (phone number 719-358-8396). Call 1-800-906-9887 for other VITA sites or to find the location nearest you. It is suggested that you call to make an appointment before showing up at a VITA site.

3) In addition to VITA, the Tax Counseling for the Elderly (TCE) program offers free tax help for all taxpayers, particularly those who are 60 years of age and older. Most of the TCE programs are operated by the AARP Foundation's Tax Aide program. Colorado Springs has eight TCE sites in and around the city. The Chapel Hills site is open on Tuesdays and Thursdays from 9am to 5pm. Call 719-235-6757 to schedule an appointment or call 888-227-7669 to locate the TCE site nearest you.

Always Spring Tax Services wishes you success with your tax preparation services whether we prepare your tax returns or not. Many happy returns!

Bookkeeping For Small Businesses

Many entrepreneurs starting small businesses do not have an accounting or bookkeeping background. Some of these entrepreneurs are highly educated professionals (Engineers, Computer Programmers, etc.). I encounter many of these highly educated professionals that assume that keeping the records for their small businesses is an easy task and can be delegated to anyone who can read and write. This attitude usually gets these small business owners into trouble during tax filing season.

What Is The Difference Between An Accountant And A Bookkeeper?
Accountants have a four year university degree (just as Engineers and Computer Programmers do). The Accounting profession has a standard set of rules to follow for keeping company records. This standard set of rules is called Generally Accepted Accounting Principles (GAAP). Accountants also have to follow the Internal Revenue Code (IRC) for tax purposes and the profession has many other sets of procedures and regulations too numerous to cover here.

Bookkeepers, on the other hand, do not need to have a four year university degree although many of them have some college training. Bookkeepers are usually highly trained on QuickBooks and have experience "categorizing" transactions in order to produce an Income Statement for the small business owner. This Income Statement is one of the documents that Tax Professionals use when preparing a tax return for the small business.

Most Bookkeepers have access to an Accountant for questions and guidance when producing the Income Statement or other Financial Statements such as a Balance Sheet, a General Ledger or a General Journal. Some Bookkeepers have regular oversight by an Accountant and some Bookkeepers only receive Accounting guidance during the preparation of the tax return.

Why Does A Small Business Need A Bookkeeper?
Most Accountants would not even attempt to design a bridge (as an Engineer would do) or to write a computer program (as a Computer Programmer would do). I am always baffled by highly educated professionals in fields other than Accounting that assume that they can do the accounting or bookkeeping for their small businesses. They do not possess the skills or the background (just as an Accountant does not possess the skills or the background to design a bridge or to write a computer program).

Bookkeepers bring both their QuickBooks skills and their knowledge of proper recordkeeping to the table.

We have a saying in the Accounting profession that "you cannot manage what you cannot measure". In order to manage your small business, you need to measure your progress.  Bookkeepers measure your progress.  Are you making money? What are you spending on materials, labor, administrative expenses? Where can you cut costs? Which of your products or services is making the most money (and which are making the least)?

When it comes to running a small business, one of the first people that you should hire is your Bookkeeper. Do not expect your Tax Professional to do your books during tax season. That expectation will not end well.

How Do You Find A Bookkeeper?
Recommendations from business colleagues or networking groups can be a good source. Always Spring Tax Services also works with many Bookkeepers in Colorado Springs and Pueblo and can therefore recommend a Bookkeeper based on both your business and your budget.

2018 Tax Law Change Affecting Small Businesses

President Trump signed The Tax Cuts And Jobs Act (TCJA) into law on December 22, 2017. This new tax law includes a 20% deduction for Qualified Business Income (QBI). This deduction is referred to as a Section 199A Deduction in the Tax Code.

QBI includes the net income derived from a sole proprietorship (Schedule C income) or from a pass-through entity (an S Corporation or a Partnership). This deduction results in a maximum tax rate of 29.6% on this income.

QBI does not include income derived from a publicly traded partnership, REIT dividends or rental income.

The calculation of the 20% deduction is relatively simple for tax filers with QBI below $157,500 for Single filers and $315,000 for Married Filing Joint filers. The amount of the deduction is simply 20% of the tax filer's QBI. Whether a Qualified Trade Or Business (QTB) pays wages does not matter for the calculation. A Specified Service Business (SSB) also qualifies for the deduction.

The deduction may not exceed 20% of taxable income reduced by net capital gain.

The vast majority of small business tax filers have incomes below the above threshold amounts.

For tax filers with QBI above $207,500 for Single filers and above $415,000 for Married Filing Joint filers, the Section 199A Deduction is the lesser of

     1) 20% of QBI or
     2) the greater of
          a) 50% of the W2 wages with respect to the QBI or
          b) the sum of 25% of the W2 wages plus 2.5% of the unadjusted basis of all qualified property

A Section 199A Deduction is not allowed for a SSB with QBI above $207,500 for Single filers and $415,000 for Married Filing Joint filers.

For tax filers with QBI above $157,500 and below $207,500 for Single filers and above $315,000 and below $415,000 for Married Filing Joint filers, the Section 199A Deduction is a more complicated calculation and will not be covered here.

As a final note, there are many issues to be clarified by Congress with regard to the Section 199A Deduction. Once these issues are clarified, the IRS will provide additional guidance on the rules and regulations governing this deduction.

2018 Tax Law Changes Affecting All Tax Filers

President Trump signed The Tax Cuts And Jobs Act (TCJA) into law on December 22, 2017. This new tax law has three main provisions that affect all tax filers.

1) The Standard Deduction amounts were increased from $6,350 to $12,000 for Single tax filers, from $12,700 to $24,000 for Married Filing Joint tax filers and from $9,350 to $18,000 for Head of Household tax filers.

2) The Personal Exemption was repealed. The amount was $4,050 per person for Tax Year 2017.

3) The Tax Rates were lowered. The new tax rates are 10% (same), 12% (down from 15%), 22% (down from 25%), 24% (down from 28%), 32% (down from 33%), 35% (same) and 37% (down from 39.6%).

Other provisions in the new tax law that do not affect all tax filers will be covered in a separate post.

Finding a Tax Professional

How do you go about finding a great tax professional? This can be a daunting task but here are some tips.

  • Check the tax professional's qualifications - The IRS has a Directory Of Federal Tax Return Preparers With Credentials And Select Qualifications on the IRS.gov website. This directory includes Attorneys, CPAs, Enrolled Agents and Annual Filing Season Program participants.
  • Use the "Choose Your Tax Preparer Wisely" guide - This guide can also be found on the IRS.gov website. Look for IRS Tax Tip 2016-06, published on January 26, 2016. The ten tips listed in this guide are a good place to start.
  • Ask the tax professional if they follow Circular 230 - Circular 230 (Regulations Governing Practice Before The IRS) covers the ethical guidelines that tax return preparers must follow. If a preparer is not aware of the Circular 230 guidelines, then they may not understand the rules governing authority to practice, diligence as to accuracy, best practices, the setting of fees, the handling of confidential information, conflicting interests, etc.
  • Ask your friends and colleagues for a recommendation - Many times, friends and colleagues use tax professionals. Ask for a recommendation.
  • Set up an introductory meeting with a prospective tax professional - Most tax professionals are more than happy to schedule an introductory meeting free of charge in order to answer any questions or concerns that you might have. You will generally know during your initial meeting whether you can trust this person with your most confidential information.

Remember that you are responsible for the information on your tax return no matter who prepares the return. However, a great tax professional will guide you through the process and be there for you if you hear from the IRS or your state taxing authority.

Why Use a Tax Professional

With all of the tax preparation options out there, why would you use a tax professional? After all, you can self prepare your tax return, you can use Turbo Tax for free if you invest with Vanguard, you can use the VITA program if your income is under certain limits, you can use Credit Karma or even some auto dealers if you want to buy a car. What is the added value of using a professional?

  • Time savings - Americans spend billions of hours filling out tax returns every year. Weigh the amount of time that you personally spend filling out your tax returns against what you would rather be doing. You generally hire someone to mow your yard, clean your house, paint your house, etc. Why do you hire someone to do these tasks? Because it saves you time and because you probably do not enjoy these tasks. If you love doing your taxes yourself, then by all means have fun...
  • Knowledge of the tax code and experience - This is one of the best reasons to use a tax professional. The Internal Revenue Code (IRC) has over 10,000 pages of provisions. Navigating through this code is the real added value of using a tax professional. Did you know that the IRS instructions and publications are not definitive (reliable) as far as the IRS is concerned? Only the IRC and court rulings are considered definitive. What that means is that the IRS can dispute what appears on your tax return even if you followed their instructions or consulted their publications.
  • After tax season follow up - If you receive a letter from the IRS, the tax professional that prepared the return is probably in the best position to get the issue resolved. Many times, the first time that I see a client is when they walk through the door with an IRS letter. We used to have a saying in the consulting world "if you do not have the time to do it right the first time, when do you have the time to do it over?". Sorting out a tax problem can be very time consuming. I am sure that you have better things to do.
  • Computer software limitations - Even the software that tax professionals use has limitations when it comes to understanding and applying the tax code. Just because you can handle a diagnostic error in a computer program does not mean that you are following the tax code. When preparing a tax return, you have to be vigilant when it comes to knowing which forms are required and what the rules are.

When you do use a tax professional, choose that person carefully. You are responsible for the information on your tax return no matter who prepared your return.